Bitcoin Briefly Slumps Nearly 7% As Traders Hedge For Pullback

Bitcoin experienced a brief decline of almost 7% after reaching a historic high of over $100,000. This significant drop raised concerns among traders about a potential market pullback as they began to hedge their positions.

Increased Demand for Bearish Options

On Friday, the digital currency fell to a low of $92,144 but recovered to stabilize at about $97,325 by 9:05 AM in Singapore. This fluctuation reflects increased volatility in the broader cryptocurrency market, which is experiencing a pause in a rally sparked by the recent endorsement of cryptocurrencies by President-elect Donald Trump.

Traders are showing heightened demand for bearish wagers, particularly put options, which allow them the right to sell at a predetermined price during a specified time frame. Notably, there has been significant activity for put options with strike prices around $95,000 and $100,000, indicating that traders are preparing for potential price declines. Additionally, there has been a rise in demand for puts priced at $75,000 and $70,000.

“Even though it seems that there’s still room for Bitcoin to grow, it's common for investors to take some profits after a surge,” explained Josh Gilbert, a market analyst at eToro. “Historically, during bull markets, we can expect to see corrections ranging from 20% to 40% in Bitcoin's price.”

Market Reactions to Political Changes

After Bitcoin surpassed the $100,000 mark on Thursday, optimism spread across the market due to Trump's selection of a digital asset advocate for the upcoming head of the U.S. Securities and Exchange Commission. Trump has promised to lift restrictions imposed by the Biden administration on digital assets, aiming to position the U.S. as a leading global center for cryptocurrency.

The president-elect's endorsement of digital currencies is strengthening market sentiment, further supported by $32 billion in net inflows into U.S. Bitcoin exchange-traded funds (ETFs) this year. This sharp rise in Bitcoin value—up 45% since the November 5 elections—has led traders to question whether the market is due for a period of consolidation.

“The surge in volatility seen recently bears the characteristics of a classic blow-off top,” noted Tony Sycamore, a market analyst at IG Australia Pty. “While we do not forecast the end of the Bitcoin bull run, we believe it signifies a phase of consolidation in the near future.”

Further indications of optimism are appearing in the derivatives market, with the Deribit exchange showing the highest open interest for options expiring at the end of January, particularly for contracts with strike prices of $110,000 and $120,000, demonstrating ongoing bullish sentiment among traders.

Bitcoin, Trading, Derivatives